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Public-sector pension plans and the discount rate assumption: The role of political incentives

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  • Bagchi, Sutirtha
  • Naughton, James P.

Abstract

We provide evidence that political pressure creates incentives for defined benefit pension plans to use higher discount rates, thus artificially reducing the reported cost of these benefit promises. We generate our inferences using a unique panel dataset for all local pension plans from Pennsylvania for 2003–2013, and by comparing the differential response of plans managed by appointed versus elected officials during a period where there was downward pressure on expected investment returns. The differential response we document is 29 basis points, which equates to a reduction in the reported liability of approximately 4.1% due to political incentives.

Suggested Citation

  • Bagchi, Sutirtha & Naughton, James P., 2021. "Public-sector pension plans and the discount rate assumption: The role of political incentives," Economics Letters, Elsevier, vol. 204(C).
    • Handle: RePEc:eee:ecolet:v:204:y:2021:i:c:s0165176521001919
    DOI: 10.1016/j.econlet.2021.109914
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    More about this item

    Keywords

    Public-sector pensions; Defined benefit pensions; Discount rate; Municipal authorities;
    All these keywords.

    JEL classification:

    • H75 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Government: Health, Education, and Welfare
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • H83 - Public Economics - - Miscellaneous Issues - - - Public Administration

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